The negative financial impact of the Covid-19 pandemic and resultant restrictions has been extremely severe, food services franchiser Famous Brands CEO Darren Hele said in an October 26 statement of the group’s results for the six months ended August 31.
The group’s vertically integrated business model comprises a portfolio of 23 restaurant brands, represented by 2 838 restaurants across South Africa, the rest of Africa and the Middle East (AME), and the UK.
An operating loss of R110-million was reported, compared with an operating profit of R376-million in the prior comparable period.
Revenue for the period decreased by 48% to R2-billion.
The group’s operating margin was 5.5%. A headline loss a share of 240c was recorded.
Prudent capital allocation and cash management were key focuses during the period and, despite cash generated from operations declining to R55-million from R573-million, the group’s balance sheet remained strong under the circumstances, with net assets of R3.3-billion, representing a net asset value a share of 464c.
Cash reserves were R341-million.
In the current environment, the board deemed it prudent to preserve cash; accordingly, no dividend was declared for the interim period.
“While the gradual easing of restrictions in South Africa and the UK in the second half of the review period enabled us to reopen parts of the business, significant components remained in hibernation until July.
“Aligned with our 2021 to 2023 strategic roadmap, and accelerated by the pandemic, our focus over the past six months was to rightsize the business, reduce costs and preserve cash to facilitate balance sheet flexibility. This focus, together with a range of mitigating measures which we swiftly implemented across the business, has seen the group weather the worst of the pandemic’s impact,” Hele noted.
About 95% of the group’s store network has reopened, with a small balance temporarily closed.
“More significant is the adverse impact the pandemic has had on new store openings, which is a key driver of brand momentum.
“Predictably, our Leading brands outperformed the Signature portfolio, primarily because quick service restaurants benefitted in the period during which delivery- and take-away-only trade was permitted, a format which is not easily adaptable for all casual dining restaurants.
“A key priority across all our brands has been to instil the trust and confidence of our customers by ensuring elevated health and hygiene protocols to demonstrate safe dining,” noted Hele.
An array of mitigating measures was implemented across the business at the outset of the pandemic. These included a freeze on capital expenditure; a reduction of operational costs (including ceasing further funding of the GBK business); providing franchisee relief in the form of temporarily deferred payments and reduced royalties and fees; negotiations with banks and landlords; strategic temporary hibernation of parts of the business; and a retrenchment programme where all other options had been exhausted, Hele informed.
Across the Leading and Signature brands, combined system-wide sales for the review period declined by 51.2% and like-for-like sales decreased by 51.7%.
Independently, Leading brands' system-wide sales declined by 48%, while like-for-like sales decreased by 48.7%. Signature brands' system-wide sales deteriorated by 70.1% and like-for-like sales by 70.4%.
“While disappointing relative to historical performance, these results were a commendable achievement in light of the prevailing environment. This solid effort is validated when compared to the industry’s results as quoted in the Statistics South Africa report published in September: South Africa restaurant sales were down 100% year on year in April, 97.7% in May, 87.7% in June, and 75.9% in July,” Hele indicated.
The group is represented by 283 restaurants in 16 countries in this region.
Although all of the AME markets were adversely affected by the pandemic, the franchise network proved extremely resilient, with only three restaurants permanently closed owing to the impact, noted the group.
Revenue for the combined region declined by 6% in rand terms to R143-million.
Operating profit decreased by 47% to R11-million, while the operating margin reduced to 7.6%.
System-wide sales declined by 30.1%. The region contributed 12.5% to total system-wide Group Brands division sales. Debonairs Pizza, Steers, Wimpy and Mugg & Bean accounted for 83.6% of turnover across the region.
The strategic integrated supply chain, which comprises the group’s manufacturing and logistics operations in South Africa, is in service to the front-end brands division.
“In light of severe disruption to global supply chains and shipping and clearing operations, accurate and agile forecasting, production planning and new stock procurement were key priorities during the review period, and significant focus was placed on reinventing processes to optimise management of personnel and inventory during the lockdown and ensure the operations were well positioned to restart as soon as required,” Hele noted.
Combined revenue for the review period declined by 44% to R1.25-billion. An operating loss of R17-million was reported, compared with an operating profit of R209-million in the prior corresponding period, while the operating margin weakened to 1.4% from 9.4%.
“Black Friday and the holiday season which follows in December are historically the industry’s peak trading period; however, it is difficult to accurately predict consumer behaviour or spend in the months ahead.
“The school holidays will be both later and shorter than previously, international tourism is likely to be muted and domestic travel and leisure activities will be constrained by reduced disposable income. Continued health and safety concerns and protocols may also curtail traditional festive season pursuits,” Hele cautioned.
In line with the group’s three-year roadmap, Hele said Famous Brands would continue to focus on rightsizing the business, reducing costs and preserving cash to facilitate balance sheet flexibility.
This will be achieved through its expansion programme (growing its Leading brands and retail business and building depth of the AME footprint); consolidation programme (disinvesting from noncore brands and manufacturing and logistics facilities, and intensifying investment in high return assets); and optimising capital management and allocation.
“We remain concerned about the weak state of the economy, which, together with the financial and psychological impact of the pandemic, will constrain consumer discretionary spend and sentiment.
“However, barring any further unforeseen events, management is cautiously optimistic that the second half of the current financial year will deliver stronger growth than the first half.
“This optimism is based on the very weak base of the first half, during which there was one month of no trade and three months of tightly restricted trade. Furthermore, aligned with the phased easing of restrictions, consumer activity has continued to increase, reflected by the group’s upward sales trend over the last three months and particularly post the review period,” Hele said.